During the Covid-19 pandemic when the entire world was grappling to cope with the deadly virus, people in villages near Kekri in Rajasthan didn’t have to worry about one thing — doorstep banking services. Thanks to 30-year-old Hanumanji at Kekri in Ajmer, a large number of people living in several rural areas of the district could avail the benefits of government schemes hassle-free. “I would cover at least 25 km daily to ensure that villagers get their pension and other government benefits. I still visit rural hamlets to make sure that banking services reach villagers,” says Hanumanji, a merchant with Fino Payments Bank.

Like Hanumanji, several of his ilk had taken banking services to far-off places across the country during the pandemic. And they did their bit quietly, away from the limelight.

Not only those in villages, daily-wagers, construction workers and vendors in metro cities benefitted as well. Though banks are accessible in metros, no one wanted to stand in long queues to get essential services. “Sometimes even after waiting for three-four hours, they (bank officials) would tell you to come back later,” says a vendor working in and around Kapashera in Delhi.

Turning The Corner

Unlike many other sectors, payments banks have grown during the pandemic. Fino Payments Bank, for example, the only listed player among its peers, turned profitable in 2020-21 after the first wave of Covid-19 when nationwide lockdown kicked in.

“Lockdown, in fact, helped us scale our business because people who could not go to banks could travel to the next-door merchant to do transactions,” says Rishi Gupta, MD and CEO, Fino Payments Bank. The bank reported a record quarterly profit of ₹14.1 crore in Q3 2021-22, higher than ₹11 crore in the entire H1FY22.

Its rival, Airtel Payments Bank, too, managed to break-even. Revenues grew at a CAGR of 58% between FY18 and FY22 (till Q3), according to a report released by the company on March 25, 2022.

The Journey So Far

In 2015, the Reserve Bank of India (RBI) granted in-principle approval to 11 players to launch payment bank services. Three players later withdrew their applications. Of the remaining eight, six — India Post Payments Bank Ltd, Airtel Payments Bank Ltd, Paytm Payments Bank Ltd, Fino Payments Bank, NSDL Payments Bank and Jio Payments Bank — are currently in operation. This category of banks was launched to allow entities with a large customer base or distribution network in rural areas to include more people into the banking system while keeping the cost of services low.

Under RBI rules, payments banks can only provide services such as small-savings account facility (up to ₹2 lakh in deposits), payment and remittance services to migrant labourers, low-income households, small businesses and unorganised sector entities.

Acquire, Scale And Turn Profitable

At Thengha village in Khajauli of Bihar’s Madhubani district, Gayatri Devi, a merchant with Fino Payments Bank, earns around ₹5,000 a month. “About 25-30 villagers come to me daily to either withdraw money, make payments, open bank accounts or buy insurance. It makes life easier for them since they don’t have to take time off to travel to a bank,” says Devi.

The rural payment ecosystem is run by BCs or banking correspondents like Hanumanji and Devi. The main products of payments banks include micro-ATM/POS (for cash withdrawal/deposit), Aadhar Enabled Payment System (AePS), remittance, bill payment and cash management system (CMS).

Payments banks provide all of these services, except lending, even though they collect deposits — the reason why industry experts say their business model would not be sustainable. However, Fino Payments Bank, Airtel Payments Bank and India Post Payments Bank are doing brisk business. The RBI in March barred Paytm Payments Banks from acquiring new customers.

“A new business needs time to scale. This is especially true for fintech-oriented models such as payments banks which are based on providing services at one-tenth the cost of traditional banking. Airtel Payments Bank has focused on building scale to serve India well, for the urban digital and rural underbanked segments. Today, the bank has turned profitable at scale, touching millions of lives in India and Bharat,” says a senior official at Airtel Payments Bank who didn’t wish to be named.

Airtel Payments Bank has access to over 1 million telecom retailers servicing an user base of more than 350 million. It provides banking services to one in every six villages across the country.

An asset-light, merchant-driven model has helped Fino Payments Bank report profits. “Our business is volume driven on a low margin. We are providing banking services through grocery shops, photocopiers, telecom operators and Internet service providers. Our cost to income ratio has drastically come down. We have built a scalable business model,” says Gupta.

Payments banks collaborate with insurance, mutual fund companies and other firms to cross-sell and up-sell different financial products to make money. They have started tying up with non-banking financial companies (NBFCs) for secured loans.

“Fino Payments has entered into tie-ups with four firms (including two fintech/NBFCs and one regional bank) for loan distribution business (consumer loans, merchant loans, gold loans and so on). It has done ₹150 crore worth of gold loan disbursal and has a gross take rate — the fee charged by a marketplace on a transaction performed by a third-party seller or service provider — of 1-1.5% with no credit risk,” says Emkay Research in its recent report.

Cash management system — digitising small-ticket cash transactions for business partners — is also a major source of revenue for payments banks. For example, a customer running an EMI from an NBFC can come to one of the touch-points of a payments bank and deposit the amount in cash to send it to the NBFC.

Fino Payments Bank is getting into international remittances as well. The bank has already received the RBI approval for the same. It is looking to scale up on the back of cross-border merchant payments and rising digital adoption in rural areas.

“Unlike urban fintechs which are struggling to make profits due to UPI, hyper competition and higher cash burns, payment banks/rural fintechs have developed diversified revenue streams and some of them have turned profitable as well,” according to the Emkay report.

Need For Regulatory Ease

Even though digital adoption is rising in rural areas, thanks to the government (Jan Dhan-Aadhaar-Mobile or JAM trinity), it still has a long way to go. In some cases, government departments ask for physical documents to facilitate a service. “Customers also want physical documents when they open bank accounts with us. More than anything, they want the passbook, which is needed if workers have to claim their provident fund,” says a merchant in Kapashera.

On one hand, fintechs are operating in regulatory vacuum, and on the other, payments banks are running with tight regulations. The competition is rising. “The adoption of UPI could cannibalise the high-margin remittance business,” highlights the Emkay report.

In fact, fintechs are eating into the market share of payments banks, especially with their foray into lending and third-party distribution businesses. “We need to regulate fintechs and neo-banks of the world to create a level-playing field between them and regulated banking entities such as payments banks. A self-regulatory body can take care of the operational side while the RBI can supervise this self-regulatory body.” says digital payments strategist Ram Rastogi.

That said, payments banks could be allowed to lend from their books on a small scale. “People ask for personal and two-wheeler loan. They prefer my services over going to a full-fledged bank. But it creates a doubt in their minds when they discover they cannot borrow money or keep more than ₹2 lakh in their bank accounts,” says Hanumanji from Ajmer.

Small-ticket lending by payments banks can help customers avoid moneylenders in villages. At the same time, it can help payments banks earn interest margins as well.

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